Tax-Free Savings for Precollege Education Expenses

published 26 August 2014

My daughter is just starting the 10th grade, and I have a Coverdell education savings account for her. I understand that even though she’s still in high school, I can tap the account tax-free for certain expenses. Which ones qualify?

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You can use the money in your Coverdell for a number of educational expenses for private or public school. Unlike 529 college-savings plans, Coverdell education savings accounts can be used tax-free for college costs as well as many expenses for primary and secondary education (kindergarten through high school).

Some of the expenses have to be required by the school to be eligible; others do not, says Rande Spiegelman, vice-president of financial planning at Charles Schwab. You can use the money for fees, books, supplies, equipment and academic tutoring, whether or not they are required by the primary or secondary school. Special-needs beneficiaries can also use the money for certain services. Computers, equipment and Internet access for educational purposes can qualify, too. You can also use the money for room and board, uniforms, transportation or other supplementary services (such as extended-day programs) but only if they are required or provided by the school. (See IRS Publication 970, Tax Benefits for Education, for more about eligible expenses.)

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To qualify to make Coverdell ESA contributions in 2014, your modified adjusted gross income must be less than $110,000 if you’re single or $220,000 if married filing jointly. For more information about Coverdell ESAs, see Another Way to Save for Education. For a list of brokerages and fund companies that offer low-cost ESAs, see SavingforCollege.com.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.